The Valuation Effects of Firm Voluntary Adoption of International Accounting Standards

Abstract

This paper documents a positive, statistically and economically significant effect of increased disclosure, in general, and IAS adoption, in particular, on firm value. We find strong positive abnormal returns at the announcement of IAS adoption and an economically significant long-run reduction in the cost of capital. This result is consistent with the theoretical literature, which documents the potential benefits of increased disclosure on the cost of capital and firm value. In addition, we find strong evidence that firms with lower valuations and higher growth opportunities experience greater valuation effects. Finally, we document a statistically significant increase in the number of analysts issuing recommendations as well as a significant upgrade in their recommendations after the IAS adoption announcement. These results highlight the importance of increased disclosure on minority shareholder protection and are consistent with IAS adoption being a positive signal of firm value.